Last Thursday, CNBC reported several times on AIG, saying that there were no shares available to short, and that the Bears were being squeezed. Geez, I guess! The stock was at about $47, up from $8 in early July.
Friday morning, they squeezed the shorts almost to $56, which was followed by a $10 selloff. Parabolic rallies usually don't end well, but they can inflict tremendous pain on the shorts if they don't get out of the way. Anyone shorting "because" AIG rallied 100% ... 200% ... got punished severely as the stock rallied 560%! Merciless!!
After the $10 selloff, giving the shorts at least some temporary relief, I got interested in the long side of AIG, but ONLY if I had solid technical reason for playing it. So I watched it, and here's what unfolded:
An Inverse H&S broke out, measuring back toward the morning highs, and then the channel, in yellow, formed. Ooo-oooo...
What I especially liked was the fact that the lows of the channel at Yellow #2, #4 and #6 were THREE successful restests of the neckline, constituting TRIPLE validated support. Lovely! If AIG could break out of The Channel to the upside, that would be a DOUBLE breakout (Inverse H&S and Channel), and the squeeze should be on again.
I got long at 49.87 with a mental stop below 49.28, the low of the Right Shoulder of the Inverse H&S. Right Shoulders "shouldn't" get taken out, and if they do, I'm not interested. Risk: $600. Targets were 50.90, the top of The Channel, and 51.90-ish, the measured move off a Channel breakout (high minus low, added to the breakout).
The channel broke out, but got only to 50.79, below the first target at 50.90. That ended up hurting my trade because I wanted to unload half my position there, but the stock came back toward my entry, and it was getting late in the game. I didn't want to hold overnight given the volatiility in this stock.
Late in the session, The Channel (seen in red here) looked to be morphing into a THIRD Bullish pattern, a Symmetrical Triangle, in white. What I didn't know, was if Data Point #4 (in yellow) already was in, or if there would be one more move down for Data Point #4 (in white), and there only was about an hour left in the session.
I decided that since I ju-u-ust had missed my 50.90 target, that might be all that I was going to get, which is why I said that it hurt my trade. If I had cashed in half the position up there, I could afford to get stopped out below 49.28 on the other half, and still come out of it with a gain. So, I raised my stop to "a break of the yellow trendline/anything below 50.00."
The yellow trendline got broken. 50.00 got broken, so I stopped it out for a very small gain. AIG put in White Data Point #4, at about 49.80, then broke out on BIG volume, and both targets got MADE.
Arrrrrrrrrrghh! LOL.
Gain: $75. Pitiful, but the amount isn't important. Having a plan and managing risk is what's important. I "coulda" had about $1,500 on the trade if I had kept my stop at 49.28, but I also "coulda" lost $600. My risk:reward was 1:2½, so I probably "shoulda" held, but we aren't always going to make the winning decision. That's all part of the game.
Accept it with dignity, and move on. Curses! Curses! Curses!
10 comments:
Hi Melf
Always enjoy reading the thought process behind a trade. Discipline in sticking to ones game plan (although at times seems to curtail profitable opportunity) definitely is key to longer term success (as can be seen by your examples of FAZ and AIG - lack of discipline in exiting a short position courted disaster!!)
Regards
Alex
Good Morning, Alex,
Thank you, and I particularly appreciate your comment this morning because I've been thinking lately that I've got to be boring readers to death with all of the detail. But having a game plan is so important, as you said, so I like to share "real life" examples from time to time.
Melf,
Please don't think the details are boring. In fact, they are the most helpful aspects of your commentary. I appreciate all of your time and effort but under no circumstances do I find you boring.
Good Morning, Mark,
Thank you, my friend. We all have so much to read, I hate to waste anyone's time. I keep trying to stop being so long-winded, but I find that I'm getting worse. LOL.
Looks like AIG got a negative write-up in Barron's at the weekend, which is why I didn't want to hold over night. After such a parabolic rally, it was vulnerable to a downgrade, or to some bad news. Barron's said that it was over-valued.
Melf,
not holding on to AIG was a good move. There is absolutely no value to the equity...
Good Morning, Kevin,
Yeah, it's a short-aqueezing momo play. Neither of my brokers has any shares to short, so The Bears aren't getting any help from additional shorting. They've rallied it almost $5 off the morning low, so they're jamming the shorts again.
When Barron's said that it's over-valued, I wondered if it had any value at all ;)
i think the way to play this is selling long dated out of the money calls...
this way you don't have to worry about getting shares to short or having those shares recalled, or the rediculous rates to borrow the shares...
also, the implied volatility is high, so you can go pretty far out of the money and collect a decent premium. Eventually, the musical chairs charade will end and the stock will have to face reality...
No, it's not boring at all. I look forward to reading your blog every day.
I am really amazed by what you do, as I had come to the conclusion that chart patterns were not very reliable and as a result never used them much in my trading. You have made me reconsider that notion and I am exploring whether some of your pattern recognition ideas could be incorporated into my own trading.
Don't feel bad about getting out of AIG too soon, though I would be cursing if I were in your shoes too! The most important thing to do as a trader is to respect your stops.
Kevin,
I don't have any experience with that, but it sounds like you know what you're doing. That probably would be a good strategy, in particular, if a stock is AT RESISTANCE, like the FAZ example from the weekend, when it was at the bottom of Rectangle resistance back in March. I'm a bit wary about playing options, though.
Hi, David,
Thanks for the kind words. Some of the patterns can be a bit tricky when they morph into something else, like AIG did on that 1-Minute chart, but I find that when there are "nested" patterns (patterns within patterns), or mulitple patterns, like the three in AIG, odds are pretty good that at least one of the targets will get MADE.
I really did yell, "Curses!" when the danged thing broke out about fifteen minutes after I folded. LOL. Thanks for your understanding about that. It's all great fun, though ;)
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